Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Barclays (LSE: BARC) (NYSE: BCS.US).
What is the sustainable competitive advantage?
In the highly competitive world of high-street banking, Barclays lacks a strong competitive advantage over its main peers, Royal Bank of Scotland and Lloyds Banking.
Having said that, Barclays’ investment banking division, Barclays Capital is one of the world’s best investment banks, bringing in profits of £6.5billion for the group during the first half of 2013.
In addition, this large investment banking arm gives Barclays an edge over its main London-listed peers. In particular, while the rates of interest charged by high-street lenders such as RBS, Lloyds and Santander are constrained by the Bank of England’s base rate, Barclays’ international investment banking arm is able to achieve significantly better profit margins.
Moreover, Barclays was one of the few banking groups not to require a bail-out during the financial crisis, which is generally viewed as a positive by customers. This gives the bank a small edge over many of its high-street peers.
However, the bank’s recent call on investors to provide more capital by way of a rights issue, has caused some investors to question the bank’s current financial strength.
Still, as long as this call for extra capital is a one off, a rights issue is preferable to a government bail-out.
Company’s long term outlook?
Barclays is unlikely to be displaced from its position within the industry anytime soon. Additionally, the rights issue should strengthen the bank’s capital position.
Indeed, according to some estimates, after the rights issue Barclays will have a Basel III tier 1 capital ratio of around 10%, slightly more than the average ratio of the largest European banks, which is expected to be around 8%.
Still, Barclays’ involvement in the Libor manipulation scandal and the recent call on investors for extra capital are only two of the bank’s numerous slip-ups during the past few years. These consistent mistakes do not give me much confidence in the bank’s ability to make a good buy and forget investment.
Foolish summary
All in all, although Barclays has performed better than some of its UK-listed peers during the last five years, the bank’s recent mistakes lead me to conclude that overall, Barclays is a very poor share to buy and forget.
